In addition to that, they can audit your books and if they determine you should have been filing quarterly estimated taxes based on when those profits were realized, but did not, they will retroactively file them for you and assess penalties and interest on them.My CPA is a former auditor with the IRS who is now an enrolled agent.Her final recommendation for anyone doing anything like this would be to find a really good tax attorney with trial privileges in tax court because they will probably need them.You definitely should seek competent paid professional advice on any scheme like this.By the way, I agree with you 100% on the government and taxes and tax avoidance is legal, tax evasion is a felony.

Most Community and Regional Banks have internal auditors, that strictly monitor the activity of the banks departments.

One of the partners actually has quite extensive experience within the real estate industry and worked as an auditor for several years.

I'd have to do a cash out refi to get that 10% back and not many of the local banks (I'm at my 10 limit)  I use like to see cash out refi's come thru their desk - nor do their auditors from what I've been told by a couple.btw: Whats 10/2?

Additionally, because of the general theme of uncertainty in this area there is no guarantee of consistency among Government auditors, some might challenge your call and others might not.When I look at what is being done in your case, my greatest concern is that while the activity is only part time and you are not actively holding your self out to the public as conducting these activities, the activities are being performed with a certain degree of regularity and frequency that might make it difficult to rebut an auditor's challenge that you are actively conducting a trade or business.

How would you explain the payback if questioned by an IRS auditor?

I talked to an energy auditor and he said he has seen this before and thought that it could come from the wood drying and shrinking a bit and causing voids in the thermal envelope.

The auditors could look at all of your documentation in order to determine what your intent was. 

I also wanted to point out that in Ohio a land contract is recorded with the county auditor. 

Just to prove to them I can be just as anal as they are I made sure to account for everything the auditor used the last time they did a site audit of one of my properties.